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ACRA affirms AAA(RU) to Rostec State Corporation, outlook Stable

The credit rating of Rostec State Corporation (hereinafter, the Corporation) stems from its very high systemic importance for the state and its very strong ties with it.

The Corporation consolidates over 800 companies from civil and defense industries, including high-tech manufacturers in such industries as aviation, conventional weapons, ammunition and special chemistry, radio electronics.

The Corporation’s assets are formed primarily for the purposes of the Russian government. Therefore, ACRA is of the opinion that the determination of the standalone creditworthiness assessment (SCA) is impractical, and only uses the Methodology for Analyzing Relationships between Rated Entities and the State.

Key rating assessment factors

Very high systemic importance. The Corporation was established by and operates in accordance with Federal Law No. 270-FZ “On State Corporation for Assistance to Development, Production and Export of Advanced Technology Industrial Products “Rostec”. The Corporation companies are contractors under state defense order (make a significant contribution to the total volume of state defense order), military and technical projects and special federal programs. Both the Corporation companies and third-party contractors participate in the manufacturing process. In 2018, the Russian President signed an executive order (dated October 24, 2018, No. 596 ”On Asset Contribution of the Russian Federation to State Corporation for Assistance to Development, Production and Export of Advanced Technology Industrial Products “Rostec”) on the transfer of shares of United Aircraft Corporation (UAC), the manufacturer of civil and military aircraft, to the Corporation. In late 2018, work began on the integration of UAC into the Corporation. The above is a clear evidence of the key role played by the Corporation in the markets strategically important for the state.

The Corporation manufactures products under international contracts, a default under which may lead to financial losses of the state and political risks. This is another important factor contributing to substantial budget risks.

As of the end of 2018, the average number of employees working at the Corporation companies stood at 504,000 people. The Corporation’s social responsibility program covers graduates development plan, mortgage arrangements, etc. This is an evidence of the high social importance of the Corporation for the state in maintaining social stability in specific regions.

The Corporation acts as a development institution in defense and civil manufacturing sectors. Decision-making regarding any company joining the Corporation is primarily driven by state interest (as far as asset consolidation in the above segment and asset management are concerned). The Corporation provides, among other means of support, financial aid to its subsidiaries.

Very strong ties with the state. The Corporation’s strategy is approved by the supervisory board that comprises nine members, who represent the interests of the state. These include Denis Manturov, Minister of Industry and Trade, board chairman, Dmitry Kobylkin, Minister of Natural Resources and Environment, Sergey Ivanov, Special Representative of the Russian President for Environmental Protection, Ecology and Transport, and other representatives of the state.

The Corporation regularly receives state subsidies and special-purpose funds under special federal programs to implement national defense projects, upgrade and re-equip production facilities and develop the national manufacturing sector. In addition, the state supports the Corporation through direct subsidizing of costs, subsidizing loan interest, and state guarantees. Given the full operational control by the state and the facts of permanent and extraordinary support from the state, ACRA assesses the ties between the Corporation and the state as very strong.

Key assumptions

  • The state will retain its shareholder and operational control over the Corporation;
  • Capital injections by the state high enough for the Corporation to perform all its financial obligations.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • A loss of shareholder and operational control by the state;
  • A change in companies controlled by the Corporation, which will lead to a decline in its systemic importance for the state.

Rating components

SCA: no.

Adjustments: no.

Support: on par with the Russian Federation.

Issue ratings

No outstanding issues.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to Rostec State Corporation was first published by ACRA on August 30, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The assigned credit rating is based on the data provided by Rostec State Corporation, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Rostec State Corporation participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Rostec State Corporation in its financial statements have been discovered.

ACRA provided no additional services to Rostec State Corporation. No conflicts of interest were discovered in the course of credit rating assignment.

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